Office Vacancy Rate Still Going Up in San Francisco

There’s mixed news from the latest market report on the office sector in San Francisco: in terms of the vacancy rate, a lagging indicator, the struggling 88M SF office market hasn’t bottomed out yet.

The office vacancy rate hit 36.6% in San Francisco during the first quarter of 2024, up from 35.6% in the fourth quarter of 2023. Total availability, which includes occupied space, ticked up to 38.7% from the 38.5% recorded at the end of 2023, according to preliminary data from CBRE.

Here’s the good news: tenant requirements, a leading indicator of how much space prospective tenants are seeking in the market, are surging.

According to CBRE’s numbers, tenant requirements jumped to 6.3M SF in Q1 2024, rising from 4.2M SF in the fourth quarter and nearly double the 3.4M SF notched in the Q1 2023, according to a report in the San Francisco Business Times.

Tenant requirements are approaching levels not seen since the pre-pandemic peak of San Francisco’s office market, the first quarter of 2020, when requirements hit 6.8M SF.

Before anyone declares that a full-scale recovery of the city’s beleaguered office market is underway, it’s worth considering that it usually takes six to 18 months for the requirements of tenants shopping for space translates into signed leases.

While the GenAI boom is growing in San Francisco, more traditional tech players are still reducing their footprints, exacerbating the vacancies caused by the widespread adoption of remote and hybrid work.

Leasing activity in the San Francisco office market dipped to 1.3M SF in the first quarter, down from 2M SF in Q4 2023, according to CBRE, which is estimating that 2024 will produce 6.5M SF of office leasing activity in the city this year.

Optimism generated by surging tenant requirements also should be tempered by the fact that many tenants shopping for space are doing so because they’re current leases are expiring. A wave of leases that pre-date the pandemic—and were signed at pre-pandemic prices—are likely to offset the impact of the tailwind from the AI boom, a recent report suggests.

Nearly a third of the existing office leases in San Francisco are set to expire by the end of 2025. According to a report from Savills analyzing CompStak data, these will include a glut of leases that were signed in 2018 and 2019 with pricing that reflects the previous market peak.

According to CompStak data, nearly 85% of the office leases coming due in the city by the end of 2025 were signed prior to 2020; 32% of the leases coming due by 2025 were signed during the previous market peak in 2018 and 2019.

The city’s office market has been trending to a continued decrease in transaction size and lease term lengths, Savills said. Transaction sizes were down by nearly 43% in 2023 compared to 2019, while lease term lengths have dropped by 15.7% for the same period.

“The recent office leases signed by AI companies and future demand from other active AI companies are a welcome tailwind for the battered San Francisco market [but] the tech subsector is still unlikely to be enough to carry the market to smoother waters for the time being,” the report said.